Microsoft's profit surge continues

Microsoft announced a 60 percent increase in earnings for its
just-completed fourth quarter and a nearly 70 percent boost in profits for
its 1999 fiscal year at the close of the market today.

The software giant beat analyst expectations for its fiscal fourth quarter
by four cents on the strength of sales of its Office 2000 suite of business
software, the company's server-based corporate programs, and
Windows NT Server operating system.

For the year, Microsoft posted a 69 percent year-over-year increase in
earnings, reporting income of $7.79 billion, or $1.42 per share, on revenue
of $19.75 billion.

Consensus analyst expectations compiled by First Call pegged the company's fourth
quarter earnings at 36 cents per share and fiscal year earnings at $1.35
per share.

But Microsoft executives cautioned that the company's profit juggernaut
could be hampered in the coming fiscal year. Greg Maffei, Microsoft's chief
financial officer, said fiscal 2000 growth would decline to the "high
teens" from 29 percent for fiscal 1999.

Maffei encouraged the financial community to "hold earnings estimates
constant" for the coming fiscal year.

Even with a recent slew of high-profile investments, like the company's
recent $5 billion stake in communications provider AT&T, Microsoft closed its fourth quarter
with $17.2 billion in cash on hand. Its equity and related investments now
total $14.4 billion.

The SEC and accounting changes
About $200 million of revenue related to Office 2000 had been pushed to the
fourth quarter from the third quarter, as a result of a coupon upgrade
program.

This practice of moving revenue from one quarter to another prompted the
U.S. Securities and Exchange Commission to probe the firm's accounting
practices earlier this year, Microsoft said last month.

The SEC review likely also encompasses the manner in which Microsoft
sets aside reserves for items such as returned
software or delayed and undelivered upgrades. In a larger context, the
items relate to the company's accounting
procedures for so-called unearned revenue.

Given the company's complex licensing agreements and upgrade caveats
with customers, revenue is at times accounted
for over the life of the agreement. The company has billions of
dollars in unearned revenue tucked away in liability
accounts until it can be shifted to an earned revenue account and
reported as earnings. For example, in its fiscal third
quarter, the company reported $2.06 billion in unearned revenue for
its "platform" products, or Windows operating system
software.

In addition, the company accounts for portions of its business
differently.

The disclosure of the SEC probe in fact came during a company
conference call last month to review changes in accounting
procedures. In one change, the MSN Access Internet business will count
toward revenue and costs. It was previously
accounted for as a part of the company's research and development
expenses.

Also, the company's consulting, product service and support, and
certified professional training---once accounted for as
part of the company's sales and marketing costs---will count toward
the bottom line as well.